Pensions drawdown: don't take too much money out of your pension fund

New evidence suggests people are depleting their pensions too quickly – and they risk running out of cash in retirement.

© David Bagnall / Alamy
Too many pension savers appear to be raiding their piggy banks too early
(Image credit: © David Bagnall / Alamy)

Tens of thousands of savers with large pensions are making withdrawals at such rapid rates that they risk running out of cash in retirement, new data from the Financial Conduct Authority (FCA), the City regulator, reveals.

The statistics suggest that while people with larger pension funds are less likely to be making substantial withdrawals, a significant number of savers are still taking out more than 6% of their money each year – and many are taking out 8% or more. But the data on withdrawals from pension funds, which became far easier to make following the 2015 pension freedom reforms, has long been a source of dispute.

Critics of the reforms point out that many people are taking far more than is sustainable out of their pensions early in retirement and so are at risk of financial hardship later in life.

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However, the FCA’s data does not provide a consolidated view of savers’ finances: the assumption has always been that a significant proportion of those making substantial withdrawals from small portfolios of pension money also have larger plans to fall back on – and that they are being more restrained with these. The regulator’s latest figures, however, suggest this assumption may be optimistic. The figures show that while large withdrawals are more common with smaller pensions, many large ones are also being depleted rapidly.

Of pension portfolios where savers are applying an 8% withdrawal rate or higher, 67% were valued below £100,000; but in 24% of cases, the overall pension was larger. This equates to more than 30,000 savers who are taking 8% of their pension money out each year.

Always take advice

Pension experts describe withdrawals of this size as highly unlikely to be sustainable. While the amount that savers can take out of their pensions each year without running out of money later in life will depend on a variety of factors – including investment returns and charges – most experts think a withdrawal rate of no more than 3% a year is more realistic. To add to the mounting concern over the issue, the FCA’s data also reveals an increase in the number of people who do not take financial advice before entering into income drawdown contracts that allow them to make this sort of withdrawal. More than a third of savers are starting drawdown plans without getting professional financial advice, the regulator’s statistics reveals.

Another worry to keep in mind is that watchdogs have begun to notice a marked increase in the number of scammers targeting pension savers with drawdown plans since the beginning of the Covid-19 pandemic.

Action Fraud has warned that with more people now conducting all their financial affairs online or by phone, the potential for fraud has increased substantially.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.